EDITORIAL: The Alaska Permanent Fund’s investment mistake

As the Alaska Permanent Fund has become the financial centerpiece of the state budget, its management has attracted warranted scrutiny. There’s a big difference, after all, between a sovereign wealth fund that exists as a backdrop to the state’s finances and one that provides 70% of state general fund revenue for the annual operating budget, as the Permanent Fund has since 2018.

One recent development for the Permanent Fund also started in 2018, and is getting a well-deserved hard look from legislators and the public: The fund’s in-state investment program, which carves out $200 million for private equity investments in businesses with Alaska ties. The opacity of the investments and the potential deviation from the fund’s stated mission have led lawmakers to question whether this is an appropriate area for Permanent Fund involvement.

There’s nothing improper about the Permanent Fund being involved in private equity. The practice, in which money is invested in exchange for a stake in a privately held company, can be more volatile but is also often more lucrative than public equity, which takes the form of stocks traded on public exchanges. Private equity now makes up roughly 20% of the Permanent Fund, and during the past 5 years, those investments earned a 29% return, double that of the fund’s stocks and nearly 10 times that of its real estate holdings.

So why wouldn’t we want the state’s proverbial golden goose investing in Alaska-connected companies? There are actually several good reasons.

1. The Permanent Fund’s mission is maximizing returns above almost all other considerations. A 2005 revision to the fund’s governing statutes added language encouraging in-state investment “to the extent that in-state investments are available and if the in-state investments have a risk level and expected return comparable to alternate investment opportunities ...”

When it comes to private equity, a comparable expected return at the moment is 29% over five years, which is an awfully high bar to clear. And when it comes to Alaskans’ jobs potentially being on the line if a Permanent Fund-invested firm is foundering, it’s easy to foresee political pressure to accept lower returns or even losses. Even with only a small fraction of the Fund’s money on the line, that’s a dangerous road to go down.

What’s more, the APFC board of trustees’ policy mandating a dollar amount invested in Alaska-connected firms is an explicit diversion from the mission of maximizing returns, as there might only be a fraction of that money, if any, to invest into private equity plays that offer comparable returns to out-of-state investments. It’s also impossible for the people of Alaska to quantify that a private equity investment made here in-state has “a risk level and expected return comparable to alternate investment opportunities.”

2. The Permanent Fund wasn’t established to be an economic development agency. The state already has one of those; it’s known as the Alaska Industrial Development and Export Authority, or AIDEA, and you’ve probably heard of it. It predates the Permanent Fund, and was established “to increase job opportunities and otherwise to encourage the economic growth of the state, including the development of its natural resources, through the establishment and expansion of manufacturing, industrial, energy, export, small business, and business enterprises.”

That sounds pretty much like the goal of the Permanent Fund’s in-state investment program, which raises the question of why the duplication in investment is necessary. AIDEA’s process is set up the way investment of public funds in local industries should be handled: With open meetings, public comment and access to the firms and amounts invested. That way, members of the public can see where the state is directing money, even if they may not agree with every investment. By contrast, the Permanent Fund Corp. refuses to identify in-state recipients of its investments or the amounts invested in each. Naturally, this leads Alaskans to believe that if the information is being hidden, there could be an improper reason why.

3. Our state is too small to guard well against conflicts of interest. The APFC board of trustees is a who’s who of well-connected Alaskans. The commissioners of the state Department of Natural Resources and Department of Revenue, as well as a former state attorney general, are trustees, and all members of the group are appointed by the governor. Even with funds being invested by third-party private firms, $200 million pumped into private equity in a state this small inevitably touches matters that one or more of the trustees are affected by. For instance, some of that money was invested in the purchase of Peter Pan Seafoods, a massively important business to the Bristol Bay region — and trustee Ethan Schutt is an executive vice president and general counsel for Bristol Bay Native Corp. To be clear, Schutt and the other trustees had no direct role in influencing the Peter Pan investment or any of the others made via the program. But when the trustees are responsible for steering funds that end up, even indirectly, affecting their own communities, business interests or personal friends, it puts them in an awkward position even if they have the best of intentions.

Lawmakers in 2005 and the Permanent Fund trustees in 2018 surely meant well by encouraging in-state investment of fund money. But the fact of the matter is, the Permanent Fund was meant to be invested for maximum return, and when its principal starts getting directed within the state, that mission gets murky quickly. The Permanent Fund trustees should leave in-state economic development funding to AIDEA and focus on the investments that have a proven track record of contributing to the solid growth the Fund has seen in recent years.